Steel cos look to govt infra push, rate cut for demand revival

December 25, 2012 15:44 IST

The domestic steel industry, now reeling under a severe sluggish demand, is betting big on the government's infrastructure push and the expected easing of monetary policy by RBI as it goes past 2012, considered by manufacturers as "pretty tough".

Despite good sales, bottom-line for most of the steel firms got impacted in January-March quarter on costlier raw material and rupee depreciation. The weak rupee deepened woes for almost all of them during April-June quarter. The US dollar-rupee exchange rate, which was 44.70 in June 2011, touched record low of 57.32 on June-end this year.

Adding salt to injury was the slackening of demand that started creeping in since July. Things became more difficult due to the monsoon coupled with an overall economic slowdown during the last 3-4 months, making 2012 "pretty tough" for the sectoral players.

None would perhaps disagree to the fact that the steel industry failed to get the kind of attention it otherwise would have got from a developing economy, which is currently reeling under the effects of high inflation and RBI's tight policy stance. Even discounted sales failed to enthuse buyers.

Steel has a direct co-relation with the GDP growth of an economy. As the India economy slowed down, there was hardly any demand pull.

The Steel Ministry did not help much, industry experts say. The ministry, however, made iron ore exports expensive to ensure that the key raw material does not go outside the country without value addition and domestic steel makers get it at a cheaper rate.

The tough business environment ensured steel makers' efforts to push sales by lowering prices was mostly in vain as inventories piled up. SAIL's inventory touched its highest to nearly one million tonne in September.

To tide over gnawing problems, efforts are required to push sales in the rural market, where one kg per capita consumption increase could have led to an annual demand spike of at least one million tonne.

"Even in the current situation what is happening is that the pie is the same and all four-five

of us are vying for the same pie. Until and unless, this pie gets bigger, it is not going to help. A push to increase rural sales is the need of the hour," said a senior official of a state-run firm.

However, as far as the statistics go, the domestic steel industry's performance is still one of the best in the current year so far compared to global peers.

While global steel production grew by 0.9 per cent in the first 11 months of the current year and Chinese production rose by 2.9 per cent, the Indian industry registered a growth rate of 4.2 per cent.

However, the 5.25 per cent growth in steel demand during the first 11 months at 66.72 million was much lower than Fitch Rating's January estimates of 6-7 per cent for the year.

According to industry experts, steel demand grows by 1.1 times of the GDP. The demand outlook for steel growth is visibly less as the country's economy is set to grow by over 5.5 per cent in the current fiscal.

"Should domestic steel demand not grow as expected in the medium to long term, steel producers would have to focus on exports to maintain their operating rates at profitable levels - a challenging proposition given the current slowdown in the developed world," an industry expert said.

An over-capacity situation in China would certainly dent India's drive to ramp up exports. With drastic cuts in production by European steel makers, the EU region hardly is a destination worth pursuing while other parts of the world are too competitive, said industry participants.

The government's infrastructure push, particularly in the previous year of the general election, could boost the demand for steel. Besides, a policy rate cut by RBI and the decision to set up a panel for fast-track clearance of big-ticket projects offer some hope to usher in a new era of investment.

While what the Indian steel industry has been achieved in 2012 is among the best in the world, the country needs to do much more than what it has done so far towards infrastructure, said company officials.